Legacies of the Past: Coinciding Inequality, Trust and Entrepreneurial Capabilities of Nations




Agwara, Hezekiah Ochieng

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Recent theories and empirical studies suggest that inequality and trust explain economic change. Less understood are the mechanisms of transmission. This dissertation focuses on trust formation and entrepreneurial capabilities of developing countries. It addresses two essential questions related to economic change: the effect of historical legacies of coinciding inequality on trust and whether this effect explains the capabilities of nations to discover and exploit entrepreneurial opportunities. It addresses several outstanding research questions in the emerging inequality-trust-institutions-economic change nexus by investigating the connection between initial coinciding inequality and policy and institutional choices. Whether this association runs through the formation of social trust and how it translates onto entrepreneurial capabilities. xii Implemented through a four-step mixed methods approach combining historical comparative analysis, quantitative regression and factor analysis methods, and qualitative analytical techniques, I identify five broad types of policies common across countries to address coinciding inequality and find a robust negative and significant association between initial inequality and today’s levels of trust. Trust appears to exert a nonlinear (U-shaped) effect on the institutions and the most effective causal set combinations explaining institutional quality comprise lower initial inequality, higher initial literacy and higher trust. Using these causal set relations to classify countries into six degrees of membership in the set of higher quality institutions, I show that nearly all countries that inherited higher initial coinciding inequality placed out of the set. Results of firm productivity analysis show progressively poorer performance the lower the set membership score. Finally, I construct an indicator of entrepreneurial capabilities and show that it correlates strongly with various measures of the innovation and trust. Regression results show that entrepreneurial capabilities are significantly lower in countries with lower quality institutions. Overall, these results suggest that initial conditions of social polarization are strongly associated with entrepreneurial capabilities today. A key implication is that policy and institutional strategies that pay scant attention to historical legacies would be less effective. Specifically, appropriate entrepreneurial and innovation policies are those that move beyond technical soundness to consider their efficacy at different trust levels.



Inequality, Trust, Institutions, Entrepreneurial, Innovation, Firm Productivity